Robert Samuelson: Can the U.S. Afford to Run a Welfare State?

Robert J. Samuelson, in Wash Post (March 5, 2004):

One great project of the late 20th century was the construction of vast welfare
states in wealthy nations to protect people against the insecurities of the
business cycle and the injustices of unfettered capitalism. One great question
of the early 21st century is whether these welfare states, facing massive
commitments to aging populations, will themselves create new insecurities
and injustices. Comes now economic historian Peter Lindert, who has thoroughly
probed the welfare state, with a surprising message: Relax.

In an important new book ("Growing Public: Social Spending and Economic
Growth Since the Eighteenth Century"), Lindert finds the welfare state
to be a resilient institution. He acknowledges the conflict. The elderly (those
over 65) are expected to reach 20 percent of the population in 2008 for Japan
and Italy, in 2015 for Sweden, and in 2020 for Germany and Belgium (the United
States will then be at about 16 percent). But Lindert thinks governments will
dodge crises by a pragmatic mix of benefits cuts and tax increases.

Will it be that easy? Last week Federal Reserve Chairman Alan Greenspan provoked
howls by suggesting cuts in Social Security benefits for future retirees.
The reaction to Greenspan's comments highlights the danger of a vicious circle:
Politicians can't cut popular benefits. Rising taxes or budget deficits then
reduce economic growth -- making benefits harder to pay. The welfare state
becomes unaffordable. It promotes economic stagnation and generational and
class competition for dwindling benefits.

After an exhaustive analysis, Lindert -- who teaches at the University of
California at Davis -- is less alarmed. So far, the welfare state is a "free
lunch," he concludes. That is, high taxes and benefits (for unemployment,
health and retirement) haven't depressed economic growth. Countries can be
caring without crippling themselves. How can this be when economic theory
and common sense suggest that heavy taxes and benefits should hurt work and
investment?

Lindert offers three answers. First, some public spending (say, on schools)
may improve economic growth. Second, generous benefits may reward -- and raise
-- unemployment, but the added jobless are mostly unskilled; their loss doesn't
hurt much. And, finally, countries with big welfare states have adopted taxes
that minimize economic damage. In Europe, taxes approach 50 percent of national
income (as opposed to about 30 percent in the United States). But Europe relies
heavily on a sales tax -- the "value-added tax" -- that, in theory,
falls on consumption and not investment or work effort.

America's desire for welfare (called "poor relief" before the 20th
century) was always less than Europe's, Lindert says. The frontier spirit
emphasized self-reliance; ethnic diversity discouraged helping dissimilar
groups. Even so, welfare in the 1800s was usually below 1 percent of national
income everywhere. The poor were stigmatized as failures. The Depression and
World War II were transforming, says Lindert. People identified with others'
misfortunes -- "that could be me" -- and yearned for collective
security.

Up to a point, Lindert's story is a cautionary tale for both liberals and
conservatives. For conservatives: There's no automatic connection between
bigger government and lower economic growth; sensible societies can deliver
both good growth and social justice. For liberals: It matters how societies
pay for welfare programs; "soak the rich" taxes can be self-defeating
by discouraging investment and risk taking. If citizens want more collective
benefits (say, health insurance), they need to pay for them collectively.
But Lindert's larger conclusion, that the welfare state has only been a free
lunch, strains belief.

In 2003 the average U.S. income per person was $34,831, report economists
Robert H. McGuckin and Bart van Ark of the Conference Board. In Germany the
average income was $25,507. Lower productivity (output per hour) doesn't explain
the difference. It was about equal in both countries. The gap has two causes
-- German workers spend less time working, and proportionately fewer Germans
work. Why? One reason may be a greater cultural desire for more vacations
and free time. But higher taxes also make work less rewarding, while higher
welfare makes unemployment more rewarding.